October 7, 2016 Q3 2016 Newsletter Lacking any Brexit-type events or any interesting company issues to discuss, I thought I would talk about a more personal subject as it relates to investing, similar to our Q2 2015 newsletter. I thoroughly enjoy researching new industries and new companies and trying to piece together a lot of disparate data to understand competitive advantages, the plausibility of growth strategies, the sustainability of free cash flow, etc. However, it can take a long time to find out if we were right or wrong in our analysis, sometimes years. We are patient investors, but sometimes it is nice to get some immediate feedback on something on which we have worked hard. Thankfully, I recently discovered an outlet to satisfy that need woodworking. Woodworking is the perfect contrast to investing because, unlike investing, you receive immediate feedback. You know instantly if you made a mistake or did a decent job. You also can actually finish something in a relatively short period of time, resulting in a sense of accomplishment that is not always present with investing. The woodworking bug was planted by my dad, who has been building things all of his life. We built the bookshelf on the left together over 10 years ago, and that seed took root in 2014 when we built the bookshelf on the right for the Napoleon Room (the room in my house I turned into a quiet room). 1
For both bookshelves, however, I was mainly an observer. My dad did the vast majority of the work. So I decided to buy my own power tools and to learn by doing. In early 2015, I bought a circular saw, a jigsaw, and a router, which sat unopened on my kitchen table for 9 months. As Christmas approached, I decided to finally build something. A friend wanted a bottle of whiskey for Christmas, so I thought I would build a box in which to keep the whiskey. After spending hours watching videos on YouTube to learn how to use my new power tools (mainly safety videos to make sure I avoided losing a finger), I built the box below. The quality certainly is not great, but I was proud of it considering my limited tools and my inexperience. More than anything, I enjoyed the sense of accomplishment so rarely found in investing. Then I bought a miter saw and a book on making boxes, which I figured would allow me to learn different types of joinery on small projects. Here is one of the boxes I built, which I gave to my oldest godchild for her birthday in January of 2016. The picture on the lid is of her and her sister (both of whom are my goddaughters). 2
I found that I could build an entire box from scratch in just a few hours. As you may recall, January of this year was a rough month. The market dropped around 10% from the start of the month. We took advantage by adding substantially to a number of holdings, nearly using up all of our available cash. In hindsight, that was a wonderful decision, and we have profited from it as every single one of those investments has bounced back, in some case quite materially. However, at the time it was not a pleasant feeling to see the drop in the market after coming off a difficult 2015. I found it almost therapeutic to simply go to my garage and make a box. That urge every investor feels to do something in difficult times was satisfied by woodworking. After getting bored with building boxes, I decided to tackle a bigger project I had been wanting to do, which was a step stool for my two oldest godchildren (the ones for whom I made the above box). The most interesting part was being forced to cut curves with the jigsaw and then have to replicate those curves exactly on another piece of wood. My talented niece, currently a senior at LSU, then painted the stepstool in my goddaughters favorite theme, The Little Mermaid. After six months and plenty of use, I am proud to say the step stool remains as sturdy as the day I built it. 3
Deciding the Napoleon Room needed an end table, I even tried my hand at furniture. It came out ok, but I made a few mistakes I could not fix easily. As a result, I never bothered to stain it and instead keep it in the garage as basically another shelf. 4
In June, Kevin and I built a playset in his background for his two boys. I found some plans online, altered them to fit our available space and desired height, and ordered the wood from a local lumber yard. We still need to add the roof plus a few other things we want to do with it. The boys and their cousins really enjoy it. To this point, I had learned more with each project. The learning curve had been steep, but I still did not appreciate what I was taking on next. Kevin serves on his neighborhood s homeowner association board, and he asked me if I could build a Little Free Library for his neighborhood. I had never heard of such a thing, so I quickly googled it. It looked easy enough just looking at pictures, so I said, Sure! A Little Free Library ( LFL ) is simply a box or shelf or crate of books in an open space, typically in a neighborhood. Anyone is welcome to take a book from the library or put books into the library. The motto is Take a book. Return a book. First begun in 2009, there are 40,000 of these things around the world now. Kevin s HOA Board decided it would be a good idea to put one in the neighborhood park, except no one on the board had the carpentry skills to build something that would not be an eyesore. Kevin told the board that he knew a guy me. 5
What I did not appreciate when I took on the task was all the little things I had never attempted before, such as: Building a door, which would have to have a window Building a roof, complete with shingles Cutting long pieces without a table saw (had to use combination of circular saw and miter saw) Making it weatherproof There were many firsts on this project for me. It would not have been a big deal except this was going to be displayed in the middle of a nice and proud neighborhood. It would have to keep books dry as well as be appealing and easy to open for kids. Just like when analyzing a stock, I tried to think of every potential pitfall. I took some plans available at the LFL website, which did not include plans for the roof or the door. I also felt the design looked plain, so I added trim all around as well. Not really knowing anything about roofing, I watched some YouTube videos and went to a local roofing supply company, State Roofing and Supply Company. I explained to the 80+ year old proprietor what I was doing. He took me to the yard in the back and personally rounded up a bunch of loose cedar shakes that were lying on the ground. He then gave me felt roofing paper and explained to me what I needed to do. He happily donated all of the supplies. I first built the body of the LFL as well as the door. I decided to use a mortise and tenon joint on the door so that I could insert the plexiglass window, which I had cut to size at Lowe s. Here is the body (red cup included for scale) and door. I included sealant around the window on both sides. 6
Since the wood was not cedar or treated, I applied a white primer that protects the wood from the elements and filled in the pocket screw holes with exterior wood putty (left photo). It looked too plain to me at this point, so I decided to add accent pieces all around (right photo). Next was the roof. I cut trim to go around the edge, which was the first time I had to use both the miter and bevel feature of my miter saw simultaneously. I also applied the felt paper to the roof, which acts as protective barrier. The cedar shakes went on next, which I capped with some cedar wood and a steel strip, both meant to ensure no water could find its way in where the cedar shakes met at the peak. I had already put on the door, for which I used self-closing hinges in case anyone was too lazy to close the door. I also applied weather strip along the inside of the door since there was a small gap due to the design of the hinge. Still not content, I then installed a magnet latch to further ensure the door stayed closed when not in use. 7
I then built the post on which the LFL would be mounted. We put the post over two feet into the ground and tamped down the dirt, so we did not need to use concrete. Finally, I cut out a piece of wood, rounding over the front edges, and used eye hooks to attach to the LFL. The LFL sign would be attached to it later. 8
After building the LFL and the post, I handed it off to Kevin to paint. We then picked a good spot in the park in his neighborhood, installed the post, attached the LFL to the post, and put in the first book (Harry Potter and the Sorcerer s Stone). The neighborhood threw a grand opening party (Kevin is cutting the ribbon). 9
The neighborhood kids began using it immediately. Leaving Kevin s house on a random weekday and seeing three kids, probably around age 12, using it really made it all worthwhile. The primary point of the LFL is to help get kids interested in reading. On the left is a picture of a girl from the neighborhood using it, and on the right is Kevin s oldest son proudly posing in front of it. Two months later, Baton Rouge and Zachary (where this neighborhood is located) saw its worst rain in recorded history. The streets of this neighborhood flooded and a few houses took on some water. I was eager to see if all of my weather proofing on the LFL proved to be enough. The inside of the LFL was so dry that fire ants used it a safe haven. Not a single book got wet. The neighborhood has fully adopted the LFL, so one of the neighbors got rid of the fire ants. Here are a couple of pictures of the LFL a week or two after the storm. 10
I am certainly proud of the LFL, especially given the fact I had only been woodworking for about six months at the time, and even within those six months I had long stretches of not doing any woodworking at all. I have not done much woodworking since the LFL was completed in June, but knowing that I have that weapon in the arsenal for stressful times provides some peace of mind. A large part of investing is about adopting the proper mindset, especially when you are investing in the unloved sectors of the market like we do. The market can disagree with us for long stretches of time, sometimes fiercely. It is during those times that woodworking can satisfy any impulse to act or to receive immediate feedback. It also provides the added benefit of clearing my head so I can approach a difficult analysis or decision with hopefully a fresh perspective. Reflecting back on the projects I have completed, I cannot help but notice a number of similarities between the way I approach investing and the way I approach woodworking. Mainly, I spend a good bit of time on the front end trying to think about it from every angle (literally, in the case of woodworking) so that I can minimize risks later on. Measure twice, cut once is an old saying of carpenters. I find myself measuring three or four times when building something, which parallels how I go about researching a stock. 11
I also spend a good bit of time getting to know my tools. In woodworking, my primary goal is learn how not to use it incorrectly (I really do not want to lose a finger). The same goes for investing. I read a lot on different ratios and metrics, often industry specific, with a primary focus on how it can be misapplied. In investing, as with woodworking, the greatest danger comes from misusing your tools. Misinterpreting data can lead to awful investing decisions, so I read whatever I can find to help guard against this risk. Finally, woodworking and investing are two areas in which there is always something more you can learn. As confident as I might feel with the work I have done at any moment, I know I can always be better. P.S. Here is a bonus photo for which I was mocked. When building the playset in Kevin s backyard, we had to sand down the long beam to get it to fit into the metal bracket that connects the legs to it. Having done the research and not wanting to harm my lungs or eyes, I came fully prepared. 12
This newsletter has been distributed for informational purposes only. Neither the information nor any opinions expressed constitute a recommendation to buy or sell the securities or assets mentioned, or to invest in any investment product or strategy related to such securities or assets. It is not intended to provide personal investment advice, and it does not take into account the specific investment objectives, financial situation or particular needs of any person or entity that may receive this newsletter. Persons reading this newsletter should seek professional financial advice regarding the appropriateness of investing in any securities or assets discussed in this newsletter. The author s opinions are subject to change without notice. Forecasts, estimates, and certain information contained herein are based upon proprietary research, and the information used in such process was obtained from publicly available resources. Information contained herein has been obtained from sources believed to be reliable, but such reliability is not guaranteed. Investment accounts managed by Booth-Laird Capital Management, LLC may have a position in the securities or assets discussed in this article. Booth-Laird Capital Management, LLC may re-evaluate its holdings in such positions and sell or cover certain positions without notice. No part of this newsletter may be reproduced in any form, or referred to in any other publication, without express written permission of Booth-Laird Capital Management, LLC. 13